ECON 1P92 Lecture Notes - Excess Supply, Monetary Policy, Interest Rate

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2 Feb 2013

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ECON 1P92 Full Course Notes

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Chapter 28: money, interest rates, and economic activity. Financial assets: money- currency plus checkable deposits, bonds- bought and sold in bond market. Bond is a promise to make payments at dates in future. Present value is the current value of one or more payments or receipts made in the future- the (discounted) present value (pv) of the bond. The present value of any asset [e. g. bond] that yields a stream of payments over time is negatively related to the interest rate. Pv of an asset is the highest price someone would pay to own the future stream of payments from the asset. Any price lower than the present value creates excess demand for the asset- drives up the assets price. The equilibrium market price of an asset is the pv of the income stream that the asset produces. Negative relationship between interest rates and asset prices.

Related Questions

Moral hazard is not eliminated in debt financing because

A) borrowers have an incentive to assume greater risk than is in the interest of the lender.

B) firms with a great deal of debt often go bankrupt.

C) principal-agent problems are greater with debt financing than with equity financing.

D) the use of restrictive covenants tends to increase moral hazard.

Why are corporations more likely to raise funds externally by debt instead of equity?

A) moral hazard is less of a problem with debt contracts

B) transactions costs tend to be higher in the stock market than bond market

C) to avoid paying dividends

D) interest rates tend to be lower than dividend rates

Which of the following is NOT a bank liability?

A) checkable deposits

B) CDs

C) mortgage loans

D) borrowings from the Federal Reserve

Banks use repurchase agreements to

A) ensure that payments on consumer loans are made on time.

B) borrow funds from business firms or other banks.

C) guard against price fluctuations on long-term bonds.

D) ensure that they always have enough funds on hand to meet their federal tax liabilities.

If a bank has a leverage ratio of 0.1 and a return on capital of 2%, what is its return on equity?

A) 0.2%

B) 2.1%

C) 5%

D) 20%

Which of the following statements about checking deposits is true?

A) It is a liability for both households and banks.

B) It is an asset for both households and banks.

C) It is an asset for households but a liability for a bank.

D) It is a liability for households but an asset for a bank.

brownherring865

Question 1.1. The risk that increased market interest rates will cause a decline in the value of an investment bank's holdings of long-term securities is known as (Points: 1)

credit risk.
interest-rate risk.
currency risk.
security risk.

Question 2.2. The difference between a savings deposit and a time deposit is (Points: 1)

time deposits pay no interest.
savings deposits pay no interest.
time deposits have specified maturities.
savings deposits have specified maturities.

Question 3.3. In banking, the spread refers to the difference between the (Points: 1)

the interest rate on long-term bonds and the interest rate on short-term bonds.
the interest rate on car loans and the interest rate on home mortgages.
the average interest rate earned on assets and the average interest rate paid on liabilities.
bid and asked prices on a bond.

Question 4.4. If you have a checking account at First National Bank, the account is (Points: 1)

an asset to both you and First National.
a liability to both you and First National.
an asset to First National and a liability to you.
an asset to you and a liability to First National.

Question 5.5. When investment banks buy or sell securities on their own account, it's called (Points: 1)

financial engineering.
proprietary trading.
underwriting.
factoring.

Question 6.6. An most important service provided by underwriters is (Points: 1)

lowering of information costs.
dealing with problems of moral hazard.
insuring firms against loss from fire.
insuring firms against loss from employee theft.

Question 7.7. The due diligence process is (Points: 1)

the process by which a firm chooses an investment bank.
when an investment bank researches a firm's value.
how an investment bank underwrites large issues.
the review of a prospectus by the SEC.

Question 8.8. Excess reserves equal (Points: 1)

total reserves less required reserves.
required reserves less total reserves.
total reserves plus required reserves.
required reserves divided by total reserves.

Question 9.9. To reduce the likelihood of excessive leverage in the banking system, governments have traditionally (Points: 1)

imposed capital requirements on commercial banks.
imposed capital requirements on investment banks.
imposed capital requirements on both commercial and investment banks.
imposed asset requirements on all banks.

Question 10.10. Any reserves beyond what is required are called (Points: 1)

required reserves.
excess reserves.
secondary reserves.
bank capital.

violetspider94

Question 1

The higher the capital utilization rate, the greater the depreciation rate.

True

False

Question 2

Higher capital utilization rates may raise the user costs of capital because higher utilization rates imply

operating at inconvenient times.

paying overtime to employees operating the machines.

operating when complementary services like transporters are unavailable or more expensive.

All of the above.

Question 3

If the rental price of capital increase, the capital utilization rate

increases.

decreases.

remains the same.

depends on whether the substitution rate is greater than the income effect

Question 4

The vacancy rate in the labor market is

the number of job openings divided by the number of unemployed people in the labor force.

the number of job openings divided by the number of workers in the labor force.

the ratio of open jobs to filled jobs.

the ratio of open jobs to the total number of jobs that employers want occupied.

Question 5

Unemployment can exist in a market clearing model if it takes some search time for workers to find jobs.

True

False

Question 6

A decrease in workersâ effective real incomes while they are unemployed will

lower the job finding rate and raise the expected duration of unemployment.

lower the job finding rate and the expected duration of unemployment.

raise the job finding rate and lower the expected duration of unemployment.

raise the job finding rate and the expected duration of unemployment.

Question 7

In the Barro model, the natural rate of unemployment is

zero.

fixed.

Question 8

If the interest rate increases, the real demand for money also increases

True

False

Question 9

Commodity money is money that has value because

of the intrinsic value of the commodity.

it is legal tender.

the government says so.

All of the above.

Question 10

High-powered money is

money held by business for investment.

total currency in circulation plus depository institution deposits at the Fed.

total currency in circulation.

government bonds held by the public and depository institutions.

Question 11

U.S. M1 money includes

currency held by the public.

checkable deposits.

travelerâs checks.

All of the above.

Question 12

U.S. M2 money includes

currency, time deposits, and government bonds.

savings deposits, small time deposits, and private bonds.

checkable deposits, savings deposits, and small time deposits.

retail money market mutual funds, small time deposits, and government bonds.

Question

Money is different from other assets like capital and bonds in that

money does not pay interest.

money has intrinsic value.

money is a better long term store of value.

All of the above.

Question

If a personâs income doubles, we expect their cash holdings to

Question 15

Real money demand does not change when

nominal GDP changes.

the interest rate changes.

the price level changes.

All of the above.

Question 16

All else constant, the price level rises when the supply of money increases.

True

False

Question 17

If the nominal interest rate were to increase, then

money demand decreases and the price level increases.

money demand increases and the price level decreases.

the money supply and the price level would increase.

the money supply and the price level would decrease.

Question 18

Real money demand is a function of real GDP and the nominal interest rate.

True

False

Question 19

The real return on money is zero.

True

False

Question 20

If the expected inflation rate is 5% and the unexpected inflation rate is 4%, the actual inflation is

-1%

1.25%

Question 21

When the rate of growth of money is constant

the inflation rate equals the growth rate of money.

the nominal interest rate rises.

real money balances are declining.

All of the above.

Question 22

A decrease in the money growth rate in the market clearing model causes

a decrease in the nominal interest rate.

an increase in money demand.

a decrease in the price level.

All of the above.

Question 23

A decrease in the money growth rate in the market clearing model causes

an increase in the nominal interest rate.

an increase in money demand.

an increase in the price level.

All of the above.

Question 24

Under price level targeting the money supply becomes

Q 25 During a recession, the interest rate falls tending to cause money demand to rise, but is at least partly offset by real GDP falling tending to cause money demand to fall.

True

False

ECON 1P92 Lecture Notes - Excess Supply, Monetary Policy, Interest Rate

ECON 1P92 Full Course Notes

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